If you do not hold Canadian residency, it is essential to comprehend the tax consequences associated with the sale of property. Notable regulations control your ability to buy Canadian real estate from a seller who is not a resident.
The good news is you can significantly lessen your taxes if you’re a non-resident who wants to sell property in Canada. Here’s some advice on how you can sell Canadian real estate.
Watch Out For Non-Resident Withholding Taxes
When a non-resident sells property in Canada, the general tax consequence is that withholding taxes must be subtracted from the sale amount. This tax rate is 25%, which you’ll give to the Canada Revenue Agency (CRA).
To illustrate: Imagine a non-resident selling a property in Canada valued at $100,000, and the initial property cost was $60,000. Withholding tax would be calculated as 25% of the selling price ($100,000 * 0.25 = $25,000), which is a sizable chunk of the potential profits ($60,000 – $25,000 = $35,000).
The most important exception to this is that if the property being sold is exclusively residential (not a property to be rented out for income) then the withholding percentage rises to 50% of the sale price.
Either way, the taxes must be forwarded to the CRA by a lawyer by the end of the month after the property’s sale. For instance, if the property were sold in October, the deadline for remittance would be November 30th.
To recover any excess taxes paid based on the actual capital gain, the seller must submit a Section 116 income tax return by April 30th.
3 Ways To Minimize Your Withholding Taxes As A Non-Resident Selling Property In Canada
For non-residents selling property in Canada, there exists a strategic approach to minimize withholding taxes.
#1: The Section 116 Clearance Certificate
There’s a way to reduce the withholding tax from 25% of the selling price to only 25% of the net capital gain. Basically, you’ll only pay taxes on the profit instead of taxes on the sale and the profit.
Let’s test this on the same illustration from earlier: A non-resident sells a property in Canada valued at $100,000, and the initial cost was $60,000. This results in a net capital gain of $40,000. The withholding tax would then be 25% of $40,000, amounting to a mere $10,000. As a reminder, the seller in the previous illustration owed $25,000; the savings potential here is big. So, how do you achieve this?
You’d have to submit a Section 116 Clearance Certificate.
#3: The Best Timeframe To Work With
The Section 116 Clearance Certificate has to be submitted before the sale’s closing or no later than 10 days after the sale’s completion. Moreover, the process of obtaining a Section 116 Clearance Certificate typically spans six to eight weeks. This highlights the importance of understanding the timeframe so you can plan accordingly.
Here’s the process in full. Imagine the sale of your property is ready to be finalized. The withheld taxes will be held in trust by your lawyer. Once the Section 116 Clearance Certificate gains approval from the CRA, the legal representative of the non-resident seller will be contacted. The lawyer proceeds to transmit the appropriate payment to the CRA. Once the payment is received by the CRA, an official clearance certificate will be issued to the non-resident’s lawyer, and any remaining funds held in trust will be given back to the seller.
Plan for this sequence of events before actually finalizing the sale.
#3: Take The Proper Precautions With Your Buyer
Typically, your buyer will want a duplicate of the clearance certificate for their documentation. They’ll want to see the certificate before any money is sent over. Make sure a copy is handy. The clearance certificate acts as comprehensive protection for the buyer against potential tax obligations from the CRA.
Typically, your attorney will manage this part on your behalf; regardless, understanding will help you. The buyer may also want written confirmation from your tax accountant or lawyer to substantiate any claims.
Congrats On Your Greater Understanding
By seeking accurate tax guidance and implementing proactive planning, non-residents selling property in Canada can understand how to minimize their withholding taxes.
But knowledge isn’t enough to navigate the process of selling Canadian real estate in a streamlined and cost-effective way. Book a free consultation today: You’ll speak with one of our certified tax advisors for assistance in taking the specific actions that will save you money.
